InterMune (ITMN) definitely had a busy week. Last Friday the stock was up 59% to $23.28 because the FDA decided not to ask for a more thorough review of its data. This was just the preview to the main event Tuesday: the actual panel ruling on the company’s lung drug. Well, trading in the stock was halted all day Tuesday. That afternoon the panel recommended approval. Wednesday the shares raced 62% higher from Monday’s close.
When a 300 Vol is Actually Cheap
Obviously, the market expected a huge move one way or another after this decision. The March $24 straddle was bid $10.5 on Monday night. That is 45% of the stock price for a straddle with less than 2 weeks to go. This is about a 335 vol!!!
Well, it was still cheap. If you owned the straddle for $10.5 and sold the stock Wednesday at $37.5 you would have locked in $13.5 on your calls. Assuming the puts would be worthless (worst-case scenario); a trader could still make more than $3 from the close on Monday. By selling all of the stock against the long calls, there is no more upside if the stock continues to rally. If for some reason the stock went back down dramatically, there still could be value in the puts, which could potentially be sold out for an additional profit.
The risk to long options is the loss of 100% of the premium paid, but the reward is theoretically unlimited!
Photo Credit Joe Pitz
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Tags: FDA Approval, ITMN, Lung Drug
